Monday, January 5, 2009

We're hearing the outlines of Obama's recommended stimulus plan. The most surprising thing is that 40% of the plan consists of tax cuts. I've been saying that tax cuts were so superior to spending that he would eventually be forced to use them, and I'm gratified that is the case. But in the end it appears to be a politically correct stimulus plan that is very unlikely to give the economy the "jolt" that it presumably needs. (And by the way, the need for economic stimulus is declining with each passing day.) If this plan were to get mired in political squabbling we would probably be better off than if it passes quickly.

He wants overwhelming support for the package, so one big reason for tax cuts is to buy Republican votes. Bipartisan support will make for good headlines, but it won't give anyone an incentive to work harder, risk more, or save and invest more.

Since the tax credits he proposes equate to taking money from those who earn a lot and giving to those who earn little, they actually reduce the overall incentive for people to work harder. Sending checks out to millions of people won't help either (last year's rebate did almost nothing for the economy). Politicians don't seem to want to face facts: you can't stimulate an economy by boosting spending, you have to do something that increases output. Keynesian thinking just refuses to die.

Giving small businesses a credit for creating jobs this year does lower the marginal cost of new hires, so it may help boost employment a bit. But to really make a difference, businesses need to know that hiring additional workers will be profitable over the long run. Rather than targeted tax cuts and rebates for doing this or that, it would be far better to just cut the corporate tax rate and let individual businesses figure out what makes the most sense for them.

The strong undercurrent to all the proposals we're hearing is that smart government types can figure out what ails the economy and prescribe a miracle cure. The problem is that the "cures" being proposed are so stuffed with politically correct garbage (e.g., let's give people a reward for creating jobs) that their impact is going to be modest at best.

The bad news is that the stimulus plan is likely to end up wasting a lot of money and growing the size of government. The good news is that it won't be as bad as the market once feared, and meantime the economy is already coming out of its slump. Hoary maxim: by the time politicians figure out a stimulus plan for an ailing economy, it's no longer necessary.